Strategic Analysis of Air Asia Berhad: External Environment & Options

This case study provides a comprehensive analysis of Air Asia Berhad, focusing on its external environment and competitive position within the airline industry. The study utilizes the PESTEL framework to examine political, economic, social, technological, environmental, and legal factors influencing Air Asia's operations. Furthermore, it applies Porter's Five Forces model to assess the competitive dynamics, including the threat of new entrants, threat of substitutes, bargaining power of buyers and suppliers, and the intensity of rivalry among existing competitors. The analysis explores Air Asia's strategic options and objectives, considering both internal and external factors to provide a holistic understanding of the airline's market position and potential for improvement. The study concludes with an overview of Air Asia's strengths and weaknesses, and its ability to sustain and grow in the competitive aviation market.

Running head: AIR ASIA BERHAD
Air Asia Berhad
Name of the Student
Name of the University
Author note

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Introduction
Air-Asia Berhad is the largest low-cost airline of Malaysia, headquartered in Kuala
Lumpur. The company has been operating successfully since its launch in 1996. The Air Asia
company is biggest in Malaysia in terms of number of destinations and fleet size. It operates
domestic and 165 international destinations across 25 countries (Air Asia, 2019). This report
presents the analyses on external environment factors and the competitive environment for Air
Asia Berhad to understand the competitive position and scopes of improvement of the services so
that it can retain the existing as well as gain new market shares. Macro-environment analysis of
the organization is most important to manage and understand external environment of the
organization. Here, PESTEL analysis will examine all the external factors such as political,
economic, technology, social culture, environment and legal, for decision making of the Air-Asia
Berhad (Cassey, 2014). It is also necessary to explore the competitive environment of the
organization, using Five Forces model, which is essential to understand to sustain in a
competitive industry and improve potential profit. The Five Force model analyses threat of new
entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and
rivalry among existing competitors in the industry.
Macro-environment analysis: PESTEL
The PESTEL analysis is the best tool to analyze the external market of the airline
industry. It analyzes short term and long term market growth or decline efficiently (Delbari,
2016). The six different factors that affect external environment of any industry are political,
economic, social, technological, environmental and legal factors. It serves as the tool to
understand potential threats and opportunities of the market. The findings are presented below.

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Political
Political analysis includes the regulations and acts needed by an aviation organization to
run the business. Political problems can create unfavorable condition to grow for the
organization. Insecurities like terrorist attacks and accidents have a negative impact on the
organization (Flouris & Oswald, 2016). However, several policies by the government to protect
passengers attracted more customers and thus, the stability of the organization in a competitive
aviation industry is restored. Some merger and acquisition policies encouraged the organization
to grow stronger Air-Asia Berhad got an approval from the government for commencing
business in India in 2013. The organization is allowed to take 49% stake of sister airline in India
(Ho, 2014). It helped to expand the business and increased profit of the organization.
Economic
The impact of economic factors on aviation industry is huge. The aviation industry
suffered heavy losses because of recession and unstable political situation in many countries of
the world. Increasing demand of laborers made it difficult for the industry to cope up with.
However, the recession left behind some positive effects in the aviation industry (Itani,
O’Connell & Mason, 2015). The cost of airline reduced and standard of service raised to stay in
competitive market. It benefitted the low cost airlines such as Air-Asia Berhad. The demand for
airline is elastic with respect to high income. Therefore, as the income grows with better world
economy, the demand for airline will also grow. The oil prices drive a record high as the political
scenario of Iraq improved. Thus, it might add multimillion to the cost of Air-Asia Berhad (Tan &
Yap, 2015). The cost of crude oil surcharge create a risk for the airline industries, as the world
economy slow down the number of people travelling for businesses and holidays reduced.

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Social culture
Though the cultural and social influences on economy and business vary depending on
the country, the cultural and demographic aspect of the country should be included for analyzing
the market condition and should be considered as it is most important for any industry (Zahari &
Romli, 2018). These factors create a major impact on airline industry as needs, preference and
lifestyle of the customer is changing rapidly. To provide better service and quality the existing
aviation organization need to develop new strategies in order to maintain its customers. The
increasing demand of low cost airlines and higher number of travelers forced the higher cost
airlines to reduce the flight charge. The commuters preferred to take airline service from the
renowned brand to ensure better service and security. Thus, to maintain the market share smaller
brands are trying to create powerful brand image to cope up with existing lifestyle and demand.
Malaysian largest low cost airline Air-Asia Berhad has a large market share as its brand name
and lower cost attracts a lot of commuters.
Technological
The impact of technology on aviation industry is significant. The industry require to
invest lump sum amount in research and development to foster cutting edge technology. As the
technological environment is dynamic and ever changing the organization need a continuous
effort to keep up the pace (Delbari, 2016). Advance science and technology revamp the security
and emergency measures. The technological advancement has helped the industry in many ways.
Now-a-days booking tickets online from the website or smartphone application of the particular
airline is most convenient. The passenger can have any kind of information or updates related to
their booking instantly (Arshed & Pancholi, 2016). Use of advance technology facilitates the
customers of Air-Asia Berhad and the organization gains competitive advantage. Alliance

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provides the opportunity to invest more in the research and development of the organization.
Therefore, the merged entity of Air-Asia Berhad will be able to maximize profit, satisfy its
existing customer base and attract more customers.
Environmental
The airline industry must ensure the environmental factors to operate business properly.
The optimal utilization of resources and environmental measures such as controlling carbon
emission, reduction in fuel consumption, and noise pollution are important factors for the
aviation industry (Yasin & David, 2014). Some international standards and safety measures are
maintained by all the aviation organization worldwide. Thus, to minimize energy and fuel
consumption Air-Asia Berhad improved the aerodynamics and engine technology. In order to
maintain ecological balance the organization has developed programs to reduce carbon dioxide
emission to check climate change. Under corporate social responsibility the organization spread
awareness and took many initiates to control carbon emission. The climate change movement
initiative called #GREEN24 launched in 2015 won the award named Green Leadership held in
Singapore at the Asia Responsible Entrepreneurship Awards (AREA) (Roy, 2014). The
organization is also focusing on reducing and recycling its waste material to protect environment.
Legal
The legal factors impacts the airline industry in many ways as the industry need to
comply with quality standards, rules and regulations introduced by the country. Different
standards are taken by the countries depending on the internal environment of that country.
These security and safety measures are taken to protect the customer rights. It has hiked the costs
of many existing airlines and force them to curtail profit level. Legal requirements and
restrictions made it difficult for the new entrants to start business (Yang & Baasandorj, 2017).

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The local aviation regulations prevented Air-Asia Berhad from consolidating the accounts of its
overseas associates such as Philippines, Indonesia, India and Thailand. Many alliance of Air-
Asia were scrapped due to local legal control and it also prevented the organization from having
majority stakes in the merged entity.
Competitive-environment analysis: Porter’s Five Forces Model
Porter’s Five Force Model analyzes the competitive forces of any industry. It will help
the Air-Asia Berhad to plan and progress its strategies in a competitive environment (Gumanti et
al., 2018).
Threat of new entrants
One of the major aspects of the five forces model is threat of new entrants. Though, the
existing organizations enjoy cost advantage, new entrants in the airline industry, such as, Tiger
Airways and Jet Star induced the competition for the Air-Asia Berhad (Adler et al., 2017). These
airline organizations also offered low cost fares which, dropped the number of customers as well
as the profit level of the existing airlines. The reason is that they all offered low cost flights thus,
quality standards and flexibility made a major difference. The cost of setting up new firm is very
high and the firm must ensures rules and regulations of the airline industry of that country, which
create an obstacle for the new entrants (Jeddi et al., 2014). The new entrant needs to bear a huge
cost to provide quality service at low cost. Air-Asia Berhad offered many services like tourism
packages, hotel bookings other than airline services. It maintained many offices around the world
to provide these services. It is generating additional revenue for the organization.

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Threat of substitutes
Threat of substitutes is also as important as threat of new entrants in the aviation industry.
The rivalry in the airline industry may impact the business of Air-Asia Berhad. The customer can
choose from other airlines available in the Malaysia as well as they can avail other transportation
services like train to reach destination. Approximately 59 low cost airlines operating in the
Malaysian aviation industry, and therefore, many options made switching easy for the customers
(Abdullah, 2015). The kind of service provided by all the airlines are same thus, making
alternative choices will not make any difference. The most vital factors influencing the customer
base in this scenario are aircraft performance, takeoff time and staff service. The price of the
flight availed depends on the booking time, date and availability. Therefore, the customer may
choose premier airline such as Singapore airlines or Malaysia Airline instead of Air-Asia as there
is no such price difference.
Bargaining power of buyers
Bargaining power of buyers affects the competitive environment of the aviation industry.
All airlines organizations offered similar products. Hence, the product differentiation plays an
important role in the airline industry. Air-Asia Berhad has a competitive advantage as it delivers
airline packages including accommodations, flight ticket, and travel guides to assist customers
during their travel. Number of people seeking airline services and their income act as the
determinant of service demand (Adapa & Roy, 2017). Accessing information related to price of
flight tickets is easily available on internet due to advancement in information technology.
Transparency and availability of price bestows the customer with bargaining power.

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Bargaining power of supplier
The limited supplier in the market provide them bargaining power. The bargaining power
of supplier induced the cost for the airline industry. Mainly two aircraft supplier are operating in
the market such as Airbus and Boeing which, may increase the cost of Air-Asia Berhad. Other
than aircraft suppliers, supplies like merchandise, fuel and food suppliers also create huge impact
on the cost of the organization (Vuthisopon & Srinuan, 2017). Previously, Air-Asia was using
the aircraft of Boeing to switch the model they leased and replaced it with aircraft of Airbus
which, the organization using presently. The cost of switching model is very high. The
organization is also burdened with the cost of training employee and high maintenance cost.
Airbus is UK based aircraft supplier which operate around the world. Therefore, the order of 200
aircraft of Air-Asia is very small compared its entire business. The possibility of bargaining
power of supplier increased due to less competitors.
Rivalry among existing competitors
Rivalry is a common phenomenon of any industry which, higher the level of competition.
There are about 59 competitors of Air-Asia Berhad in the Malaysian market. Some of the low
cost airlines are JAL Express, Air Arabia, Tiger Airways and JetStar Airways. As the price and
service provided are similar they can offer service in different route where, Air-Asia does not
operate. This will help them get the customers easily. To compete with the rivals Air-Asia may
run the business on fixed cost to sustain in the market (Delbari et al., 2016). The organizations
have to bear refund costs for flight cancellation, paying off debts and employee retrenchment
cost before it exit the industry. Therefore, the exit cost of any airline organization is very high.
This may compel the organization to continue operation even if there is loss to maintain its fixed
costs. The industry became competitive because of many existing competitors. Air-Asia Berhad

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expanded its services except flight booking, it provided tour packages and opened a hotel named
Tune hotel near airport to cater its customer in a better way.
Recommendation and Conclusion
The above PESTEL analysis of the Air-Asia Berhad will help the organization to develop
new products, executive strategies, sales planning and operational planning. It examines the
organization’s position with respect to external influential factors. Five Forces Model analyses
the competitive environment of the organization to understand potential threat and opportunity of
the market. It enables Air-Asia to know threat of new entrants, threat of substitutes, rivalries of
existing competitors, bargaining of buyer and bargaining of supplier. The recommendation for
the Air-Asia Berhad are as follows:
 To make their customers more comfortable while travelling, the organization may
improve the quality of the seats and services provided inside the aircraft.
 They can simplify the website and application used for flight booking to make it more
user friendly.
 Increasing terrorist attacks create a threat for airline industry. The organization should
focus on security and vulnerability measures to ensure customer safety. This will help the
organization to attract more customers than other airlines.
 The organization may implement trace detection technologies to collect the sample of
explosive materials.
 To run the digital security system properly the airline organization may employ more
professional human operators to detect and manage the security system.

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 The organization should engage experts to improve efficiency of its service which may
reduce the overhead cost. They should motivate and encourage the employee to be more
productive. The employees should engage in decision making for the organization.
 More alliance and merger with other airlines of different country will provide it better
market and opportunity. In this way it can also reduce the threat of entering new market.
From the above discussion it can be concluded that Air Asia Berhad can improve its services to
sustain its position in the Malaysian aviation industry. With the improvement in the economy
domestically, as well as globally, the number of air travel has increased considerably in the past
two decades. This global growth of economy not only increased the number of business travel in
the world including Malaysia, but it has given rise to the number of leisure travellers also. Along
with that, there has been significant expansion of the aviation industry of Malaysia with large
number of airlines operating domestically and internationally implying a tough competition.
Hence, to sustain in the aviation industry with a substantial profit, the airline companies must
develop strategies to gain competitive advantage in the market. In the above analyses for Air
Asia Berhad, it has been observed that the external factors are quite favourable for the growth of
the company in the near future. However, from the competitive analysis, it has been observed
that Air Asia must focus on certain things, such as, providing more comfort to the customers
while maintaining cheaper cost, improving security measures, more usage of mobile application,
reducing overhead cost and going for merger and acquisitions for reducing the threats of new
competition and substitution. The findings are also useful for making long term profitability
strategies for Air Asia Berhad for securing a better market position.
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